Is Government Regulation Stalling Job Growth?

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A standard Republican talking point on the economy is that government regulation is a key factor holding back job growth. Data supporting this argument is never presented because to Republicans, it is axiomatic that government regulation is per se bad. Whether it is holding back job creation is essentially irrelevant. All that matters is that high unemployment provides an opportunity to tie deregulation to jobs and thus move forward the GOP political agenda to dismantle Dodd-Frank and declaw the Consumer Protection Bureau. But what is the truth?

Good information on the costs of government regulation is notoriously difficult to come by. The methodology for making such calculations is not well established and fraught with biases. For example, one often sees high estimates that simply add up the maximum theoretical cost without making any kind of effort to calculate benefits. It would be as if one looked at taxation completely divorced from spending. Such a calculation essentially takes as its premise that zero regulation and taxation is optimal for society.

Another problem is that the costs of regulation don’t necessarily impact on employment. In fact, regulations may increase employment by forcing businesses to hire more workers than they need to deal with compliance. Thus the economic impact of a regulation may be to reduce productivity and growth, but not necessarily raise unemployment. In partisan debate, higher costs are just assumed to result largely, if not exclusively, on fewer jobs.

Finally, in terms of the current economic situation, it’s of no analytical value to look at some calculation of the aggregate cost of government regulation unless one can show that there has been some significant increase that coincides with the economic slowdown. If regulatory costs are roughly the same now as they were during the George W. Bush administration, then what reason is there to believe that such costs had no effect on employment then but now do? It makes no sense, logically.

When pressed for data to support their argument that deregulation is a magic bullet that will turn the economy around, conservatives often point to a study commissioned by the Small Business Administration and published in September 2010. The study was performed by economists Nicole Crain and Mark Crain of Lafayette College. However, there are a number of problems with relying on this source.

For one thing, the analysis stops in 2008. To the extent that the SBA study tells us anything about the cost of regulation, it says that the Bush administration was extremely lax about reducing a burden that Republicans now say is the economy’s biggest problem. A Congressional Research Service study has also identified important methodological weaknesses in the SBA study that cast grave doubt on its validity. CRS noted that some of the sources used to calculate regulatory costs appear to have been misused or misinterpreted, some cost figures were cherry picked to provide the highest possible cost estimate, and many of the estimates are from studies done decades ago with little contemporary value.

Efforts to find specific regulations that are hampering business expansion and employment growth have not actually found any. While business groups based in Washington will quickly rattle off a list starting with the Affordable Care Act, surveys of actual businesses paint a different picture. When McClatchy newspapers interviewed a number of small business owners to see what regulations are holding them back, it couldn’t find any.

“None of the business owners complained about regulation in their particular industries, and most seemed to welcome it,” the McClatchy report found. Monthly surveys by the National Federation of Independent Business show that small business concerns about regulation are lower today than they were in the 1990s when the economy was booming.

Rather than regulation, the main problem that turns up again and again is a lack of business, a lack of sales, a lack of customers. In other words, a lack of aggregate demand in the economy. As Harvard economist Martin Feldstein put it in a July 15 commentary:

“The high unemployment reflects the lack of demand rather than any fundamental problems with the U.S. labor market…. The reduced spending by consumers has caused companies to cut back on production. With little prospect for an upturn of demand for their products, businesses have laid off numbers of workers, reducing their incomes and raising the unemployment rate.”

This observation is confirmed by research. A July 21 Federal Reserve Bank of New York study examined several small business surveys and concluded that the principal cause of layoffs and slow hiring is poor sales and weak consumer demand for firms’ products and services.

An August 28 report in the Washington Post interviewed several large chain store executives and all said they are seeing pressure on consumers to cut back and put off purchases. The causes are high unemployment and a lack of confidence in the future.

It’s in the nature of politics that politicians will use whatever opportunity that presents itself to pursue their long-term agenda. Republicans and businessmen are always opposed to government regulation and so it is convenient opportunism for them to use the current concern about jobs to argue that it is a major stumbling block to employment growth. But that doesn’t make it true.